Monday, April 27, 2009

As [some] relish reports that President Barack Obama is seeking to temper the image of the United States as the world’s preeminent power, it can be forgotten that there are overseas allies who want and need America to remain strong and vigilant against rising threats. They want America to continue its leadership role in forging coalitions to meet global dangers. This message was very clear at a conference April 17 in Washington sponsored by two Japanese think tanks, the Sasakawa Peace Foundation and the Ocean Policy Research Foundation.

The theme of the conference was the U.S.-Japan Maritime Alliance and how it can be expanded. Japan’s ambassador Shotaro Yachi opened the session by reading a message from Prime Minister Taro Aso calling for Washington and Tokyo to take the lead in building an “Arc of Freedom and Prosperity” which would sweep across “Japan, the Republic of Korea, Southeast Asia, the Indian subcontinent, the Middle East, Central Asia, Guam, Central and Eastern Europe, the Baltic region and Scandinavia roughly speaking.” This geographical description is of the opposite side of the “Arc of Instability” that has been used since the 1970s to describe the main trouble spots in the Eurasian landmass. The positive concept of the Arc would be founded on the values of “freedom, democracy, basic human rights, the rule of law and the market economy” according to Aso. The Asia-Pacific section of the Arc, extending as far as the Persian Gulf, would be backed by a “Seapower Network” that should expand beyond the current U.S.-Japan alliance to include Australia, India and the United Kingdom.

In this formulation, it is not difficult to understand from where the threats to those protected by the Arc alliance are expected to come. For diplomatic reasons, Aso had to say that the Arc “is not intended to contain China or Russia,” but his extended remarks were filled with examples of the dangers Beijing and Moscow pose to peace, stability and economic development. The Prime Minister noted China’s advancement to the ocean is particularly spectacular. The Chinese Navy is proactively modernizing. We also have information that China is working to build aircraft carriers. China’s opaque expansion and modernization of its military, including the Navy, may greatly impact the maritime security environment which is so important to both Japan and the U.S. Moreover, Russia is increasingly more actively engaged in military activities in the Far East.

A major element in the “Japan-United States Seapower Alliance for Stability and Prosperity on the Oceans” paper presented at the conference by the Ocean Policy Research Foundation is development of seabed resources, both minerals and energy. The proposal calls for joint research and the sharing of new technology that can reach these untapped resources. But it is also clear that ocean wealth will also have to be protected from rivals. Prime Minister Aso pointed out that Japan and China have conflicting claims in the East China Sea, and that “China continues to carry out unilateral development based on its own claims. This cannot be considered to be an action of a responsible major power.” He also noted “excessive claims of jurisdiction by coastal states. This is a problem the U.S. Navy has faced from Chinese harassment of its ships in international waters. Beijing claims that the Exclusive Economic Zones awarded by the UN Law of the Sea Treaty confer sovereignty over large ocean expanses and not just a limited right to exploit resources.

Japan also has territorial disputes with Russia, and Aso mentioned the construction plan Moscow has for a strategic nuclear submarine base on the Kamchatka peninsula. China has recently built a similar base on Hainan Island menacing the South China Sea.

Former Prime Minister Shinzo Abe appeared in person to deliver the keynote address at the Sasakawa conference. He echoed Aso’s arguments, and even compared, without naming names, the rising Chinese threat to that posed earlier by the Soviet Union. He stated that during the Cold War, Japan was the “cap in the bottle” past which the Soviet fleet could not pass from its Pacific base at Vladivostok. He then observed that the “Japanese island chain can fulfill the same role against another power if it pushes the envelop.” Geographically that chain could be seen as extending all the way south to Taiwan and the Philippines, forming a base for containing China’s naval ambitions.

Beijing is well aware of island geography. In the 2005 report on China Military Power issued annually by the U.S. Defense Department, General Wen Zongren, Political Commissar of the elite People’s Liberation Army Academy of Military Science, is quoted as saying that taking control of Taiwan is of “far reaching significance to breaking international forces’ blockade against China’s maritime security….to rise suddenly, China must pass through oceans and go out of the oceans in its future development.” Chinese strategists have discussed the creation of their own “string of pearls” naval bases to control the sea lanes of the Pacific Rim.

The OPRF paper urges Washington and Tokyo “to cooperate with all nations opposing the emergence of any aspiring hegemonic state that could disrupt the balance of power on the seas and create instability in the security environment” another thinly veiled reference to the rise of China. “The process of building the new seapower alliance will also serve as a new challenge for the Japan-U.S. alliance that many believe is beginning to waiver, “says the OPRF document.

An example of those who believe the alliance should not just waiver but dissolve was presented during the question period following Abe’s speech. Stanley Kober, a research fellow at the libertarian Cato Institute, cited out of context George Washington’s warning against “entangling alliances.” He then claimed such alliances only serve to keep the world divided. He asked the former Prime Minister, “If the U.S. and Japan strengthen their alliance, what will Russia and China do?” Kober also thought it was a mistake to try to include India in the alliance. Cato has a history of trying to undermine American defense policy, and has been exhibiting a growing pro-Chinese bias.

Cato Vice President Gene Healy made the same reference to “entangling alliances” in a recent op-ed calling for “genuine, and deep, cuts in military spending” in which he also cited the “counterintuitive claim” of Christopher Preble, Cato’s Director of Foreign Policy Studies, that “our military dominance actually makes us less safe.” Last summer, Malou Innocent, another Cato foreign policy analyst, wrote an op-ed criticizing presidential candidate Sen. John McCain for “talking too tough on Russia and China.” She called on the next president “to continue cooperating with China and Russia.” Cato pronouncements are obsessed with trade and investment in China [...].

Abe responded to Kober by restating that the U.S., Japan and India “are democracies with shared interests” who also believe in human rights and the rule of law. Next year will mark the 60th anniversary of the U.S.-Japan alliance. Abe declared, “The United States has no better friend in the world than Japan.” Other Japanese speakers at the conference reinforced this point. Shunji Yanai, an advisor to the Ministry of Foreign Affairs and professor at Waseda University argued that the Iraq War has helped pull Washington and Tokyo closer together, as has the crisis over North Korean nuclear and missile programs. Japan sent military engineers to Iraq to help with reconstruction and has deployed naval units to support coalition operations in Afghanistan. Yanai also believes that North Korea has a secret uranium enrichment program that has not been addressed by the Six Party Talks orchestrated by China.

Naoyuki Agawa, a Dean at Keio University, joined Yanai in support of changes in Japanese constitutional interpretation to allow Tokyo to play a more active role in collective security operations. He agreed that joint operations in the Middle East have pulled the two fleets together and proclaimed, “Despite legal and constitutional restraints, the Japanese Maritime Self-Defense Force is willing to fight alongside its fellow sailors” in the U.S. Navy.

It may not come to that. A strengthened and expanded alliance of maritime nations can serve as a powerful deterrent to the ambitions of China, Russia and their dangerous prodigies in Iran, Burma, North Korea and elsewhere. It will, however, take more than proclamations. Words must lead to actions.

The lunch speaker at the conference was Deputy Chief of Naval Operations Vice Admiral William Crowder, who had been commander of the U.S. 7th Fleet in the Pacific. He was dismayed by how much the size of the U.S. Navy has declined in recent decades. Today it has less than half the warships that were as sea when Ronald Reagan was president. The cuts in naval programs announced April 6 by the Obama administration, along with other cuts in high end programs involving aviation and missile defense that are part of the proposed 2010 defense budget, will undermine the favorable balance of power now enjoyed by the United States.

A warning from Japanese leaders of what is at stake in Asia could not have come at a more important moment.

William Hawkins is a consultant on international economics and national security issues.

On April 21, the Special Inspector General for the Troubled Asset Relief Program Act of 2009--"SIGTARP"--submitted his quarterly report to Congress on his office's activities in relation to the TARP program. The report is a disquieting document that should be read by every American--certainly be every taxpayer.

The Inspector General's report documents the stunning and at least partly illegal expansion of TARP from the $700 billion originally allocated by Congress to what is now a $3 trillion complex of programs. This chart shows the various programs that are now included within SIGTARP's oversight, and how they have expanded from the initial $700 billion. Note that some of the programs are still incipient; $3 trillion is by no means a final number. [...]

The report is valuable for a number of reasons, not least because it provides the most coherent description I've seen of the various programs now underway to bail out--or take over, as the case may be--the country's financial sector. So far, the report's most commented-upon feature is its description of the many criminal investigations that are now underway, arising out of TARP:

Both from the Hotline and from other leads, SIGTARP has initiated, to date, almost 20 preliminary and full criminal investigations. Although the details of those investigations generally will not be discussed unless and until public action is taken, the cases vary widely in subject matter and include large corporate and securities fraud matters affecting TARP investments, tax matters, insider trading, public corruption, and mortgage-modification fraud.

It is safe to assume, however, that the investigations now in progress represent not even the tip of the iceberg. The most troubling feature of the SIG's report is its documentation of reluctance on the part of Tim Geithner's Treasury Department to make even modest efforts to protect the interests of the taxpayers. To take just one glaring example, Treasury has refused to require banks to account for what they do with the billions of dollars they receive in TARP money:

Treasury has indicated, however, that it will not adopt SIGTARP's recommendation that all TARP recipients be required to do the following:

• account for the use of TARP funds• set up internal controls to comply with such accounting• report periodically to Treasury on the results, with appropriate sworn certifications

In light of the fact that the American taxpayer has been asked to fund this extraordinary effort to stabilize the financial system, it is not unreasonable that the public be told how those funds have been used by TARP recipients. Treasury is now conducting regular surveys of the banks' lending activities; however, with the exception of Citigroup and Bank of America, Treasury has refused to seek further details on TARP recipients' use of funds.

Not just failed, but "refused." The report adds:

The American people have a right to know how their tax dollars are being used, particularly as billions of dollars are going to institutions for which banking is certainly not part of the institution's core business and may be little more than a way to gain access to the low-cost capital provided under TARP.

Later, with respect to the Capital Assistance Program specifically, the report says:

Treasury announced that it would require CAP applicants to set forth how they intend to use CAP funding. Notwithstanding this requirement, Treasury adamantly continues to refuse to adopt SIGTARP's recommendation that it require CAP recipients (and indeed all TARP recipients) to report on how they actually used TARP funds. Putting aside the value of this recommendation in other TARP programs, SIGTARP submits that it is largely meaningless to require an applicant to report on its intended use of funds without setting up a mechanism to monitor its actual use of funds.

[...]

The Treasury Department is now managing a vast portfolio of "troubled assets" on behalf of the American people. It has not, however, developed any plan for how to dispose of them, or how to manage them in the meantime. This may relate to the Obama administration's failure to staff the Department:

In its Initial Report, SIGTARP noted that "[t]o date, Treasury has not fully developed significant policies or controls with respect to asset management issues," and recommended that "Treasury needs, in the near term, to begin developing a more complete strategy on what to do with the substantial portfolio that it now manages on behalf of the American people."

As of the drafting of this report, however, no asset manager had been hired to manage the existing asset portfolio, and no investment strategy has been developed.

The Special Inspector General's office employs a number of people who are experts with respect to the various kinds of fraud that are invited by TARP's manifold programs. It is obvious from his report that the SIG foresees the prospect of fraud on a truly massive scale. Yet, for some reason, Treasury does not appear to have the same level of concern about fraud that could cost the taxpayers hundreds of billions of dollars.

With respect to specific TARP programs, the report goes into considerable detail about the features of the programs that make them susceptible to fraud and manipulation. Here, the SIG discusses the "Public-Private Investment Program," one of the most controversial aspects of TARP. PPIP is intended to form public-private "partnerships" to buy distressed assets, mostly mortgage-backed securities. But the vast majority of the risk lies with the taxpayers, while the program is rife with opportunities for connected insiders to make a fortune. The following excerpt is lengthy, but easily understandable:

Many aspects of PPIP could make it inherently vulnerable to fraud, waste, and abuse. First, PPIP deals with assets that have recently been illiquid, making valuation difficult, therefore raising the danger that the Government will overpay for the assets. Second, many of the participants in these markets, such as hedge funds, are substantially unregulated and the internal oversight and compliance capability at those institutions vary widely. Next, the interrelationships between the market participants can be extremely complex and difficult to anticipate: the same entity might buy and sell toxic assets for its own benefit and manage portfolios of toxic assets for others, all while holding or managing equity or debt securities of the banks and other institutions that have large positions in the same toxic assets. Finally, the sheer size of the program -- up to a trillion dollars for the PPIFs and up to another trillion dollars for the expansion of TALF -- is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives.

After receiving initial briefings from Treasury on PPIP and discussing the issue with law enforcement partners, SIGTARP has identified three of the most significant areas of potential vulnerability to fraud and abuse applicable across the program.

The program is rife with potential conflicts of interest. Again, the explanation is lengthy but is clearly written:

The first area of vulnerability is that the private parties managing the PPIFs might have a powerful incentive to make investment decisions that benefit themselves at the expense of the taxpayer. By their nature and design, including the availability of significant leverage, the PPIF transactions in these frozen markets will have a significant impact on how any particular asset is priced in the market. As a result, the increase in the price of such an asset will greatly benefit anyone who owns or manages the same asset, including the PPIF manager who is making the investment decisions.

As an extremely simplified example from the Legacy Securities Program, assume that the fund manager of the PPIF owns 1 million bonds of MBS [Mortgage-Backed Security] X in its own account. MBS X is currently valued on the fund manager's books at 20% of its original value, or $20 per bond, for a total of $20 million. The fund manager does an estimate and believes that, in a fully functioning market, MBS X is actually worth 30% of face value, or $30 per bond. In the absence of a conflict of interest, the fund manager, using PPIF funds, might be willing to pay up to $30 per bond in the market. However, the fund manager realizes that it can make more money for itself if it drives the price even higher. It thus uses the funds it controls in the PPIF to buy 1 million MBS X bonds from someone else at $40 per bond, or $40 million. This transaction has the potential, in the current illiquid market, of setting the market price for that MBS X at $40, even though that price is far above what the MBS is actually worth. As a result, the fund manager could sell the MBS on its own books and recognize a profit of $20 million. Over time, however, the price of MBS X declines to its actual value, $30 per bond, and results in a $10 million loss to the PPIF fund. This loss has no negative impact to the fund manager, however, because it did not have any of its own money invested in the fund. Indeed, the fund manager has made money on the PPIF, because it has received fees from both Treasury and the private investors based only on the total size of the PPIF. In other words, the conflict results in an enormous profit for the fund manager at the expense of the taxpayer.

The same incentives to overpay could exist in the Legacy Loans Program and in numerous other factual circumstances. The incentives exist, for example, even if the fund manager does not own MBS X but is merely managing other funds that hold MBS X, as the manager earns fees based on the value of that fund, a value that would, in this example, be significantly overstated (temporarily) as it can increase the value of that fund based on valuing, or "marking" the MBS X at the inflated "market" price that it set.

A second risk identified by the Special Inspector General is collusion between participants in the PPIP program--the issue that we highlighted here:

A closely related vulnerability is that PPIF managers might be persuaded, through kickbacks, quid pro quo transactions, or other collusive arrangements, to manage the PPIFs not for the benefit of the PPIF (and taxpayers), but rather for the benefit of themselves and their collusive partners. In both the Legacy Loans Program and the Legacy Securities Program, the significant Government-financed leverage presents a great incentive for collusion between the buyer and seller of the asset, or the buyer and other buyers, whereby, once again, the taxpayer takes a significant loss while others profit.

This time, consider an example from the Legacy Loans Program. Imagine that a bank owns a pool of mortgage loans that both it and the private equity firm investing in a PPIF values at $600 million. The private equity firm invests $60 million into the PPIF, which is matched by $60 million of TARP funds, and which is leveraged by a loan of $720 million guaranteed by FDIC (the 6-to-1 debt-to-equity ratio). The PPIF private equity firm surreptitiously agrees with the bank to overpay for the pool of loans and causes the PPIF to bid $840 million at auction for that pool. After the auction, the bank secretly pays the PPIF private equity firm a kickback of $120 million, or half the difference between the auction price ($840 million) and the true value ($600 million).

Although the PPIF will eventually perform poorly as a result of the overpayment, the private equity firm's loss is relatively small. Even if the PPIF was completely wiped out, the most the PPIF private equity firm could lose is $60 million, which would still give it a guaranteed profit of at least $60 million as a result of the kickback, a 100% return. Meanwhile, the bank would have gained an illegal benefit of $120 million, all at the expense of the taxpayer and FDIC. Of course, in practice, the collusive scheme would be far more complex and would likely involve a series of affiliates and offsetting transactions, but the principle would be the same.

The same collusion could occur in the Legacy Securities Program between buyer and seller. Similarly, collusion could occur among other buyers.

The third broad area of risk identified by SIG is money laundering:

Because of the significant leveraging available and the inherent imprimatur of legitimacy associated with PPIP and TALF, these programs present an ideal opportunity to money-laundering organizations. If a criminal organization can successfully invest $10 million of illicit proceeds into a PPIF, not only does the organization enjoy the possibility of profiting through the Government-backed leverage, but any eventual distributions from the PPIF are successfully laundered because they appear to be PPIF investment gains rather than drug, prostitution, or illegal gambling proceeds.

[...] But it gets worse. Because Treasury has now announced that Public-Private Investment Fund money will be available to purchase mortgage-backed securities under the Term Asset-Backed Securities Loan Facility program. This makes the Special Inspector General distinctly unhappy:

In announcing the details of PPIP, Treasury has indicated that PPIFs under the Legacy Securities Program could, in turn, use the leveraged PPIF funds (two-thirds of which will likely be taxpayer money) to purchase legacy MBS through TALF, greatly increasing taxpayer exposure to losses with no corresponding increase of potential profits. By way of example, a PPIF manager could raise $500 million of private equity, which would be matched with $500 million of TARP funds, and a loan of an additional $500 million from TARP funds (according to the term sheet, loans will only be given up to 50% of the total equity if investments will be made through TALF rather than 100% otherwise). The PPIF could then take the total $1.5 billion, bring it to the TALF window, and effectively use that money as the "haircut" amount in a TALF financing to purchase legacy RMBS [Residential Mortgage-Backed Securities].

Assuming that the haircut will be 20% (larger than any existing haircut), the PPIF will be able to receive a non-recourse loan from FRBNY [the Federal Reserve Bank of New York] for an additional $6 billion, enabling the PPIF to purchase $7.5 billion in legacy RMBS. The private investors would thus enjoy 50% of the profits from this enhanced buying power, but only be exposed to less than 7% of the total losses if the fund were wiped out.

Aside from potential unfairness to the taxpayer, this leverage upon leverage on legacy RMBS raises other significant issues. First, it only magnifies the dangerous incentives discussed above (the conflicts of interest and collusion issues), because the fund manager now has up to five times the buying power than it would if it participated in the Legacy Securities PPIF alone. Moreover, it severely undermines the validity of the methodology that the Federal Reserve has used to build the haircut percentages in TALF thus far. The Federal Reserve has told SIGTARP that it has determined its haircut percentage based at least in part on the fact that the haircut represents a TALF borrower's "skin in the game" -- someone's own capital at risk -- that incentivizes appropriate due diligence on the borrower's part. If leveraged PPIFs are permitted to participate in TALF, that effectively lowers the private equity's skin in the game by at least the amount of money borrowed from TARP, materially diminishing the incentive to do due diligence. Put in simpler terms, an investor who is funding 100% of the haircut amount with his own money (as is typical in TALF) can logically be expected to be far more careful than one only putting up 33% (as would occur under this example).

It strikes me as a deep irony that the Treasury Department is creating perverse incentives similar to those that plunged the country into a financial crisis in the first place.

Surely that must be the end of the bad news? No. We haven't yet gotten to the government's Mortgage Modification Program, which bails out individual homeowners. Here, the Special Inspector General brings considerable expertise to the table:

SIGTARP's recommendations were made in the context of the Special Inspector General's prior experience as the founder of the Mortgage Fraud Group in the United States Attorney's Office for the Southern District of New York and after consultation with and advice from mortgage fraud experts at the Federal Bureau of Investigation. The recommendations address some of the patterns of the rampant mortgage fraud that contributed to the current financial crisis, including corruption of many of the potential gatekeepers who were supposed to limit such fraud: attorneys, appraisers, notaries, mortgage brokers, title insurance agents, and insiders at banks and mortgage originators.

Recognizing that many of the most prevalent frauds had common characteristics, SIGTARP's recommendations reflected an attempt to shield the program from such schemes before they could be adapted to the mortgage modification plan.

Is the Treasury Department heeding the experts' warnings about how to avoid fraud in the mortgage modification program? The short answer is No. Read the report for the details.

What conclusions can we draw? 1) The government's $3 trillion and counting TARP program represents the greatest opportunity for sharp operators to profit at taxpayer expense in history. 2) The Obama administration is either in favor of giving Wall Street sharks this opportunity or, at a minimum, doesn't much mind doing so. (If this seems odd, remember where Obama got the biggest chunk of campaign contributions in 2008.) 3) It may be that the TARP complex of programs is the beginning of a national-socialist type takeover of the financial services industry by the federal government. Thus, 4) we can only hope that this turns out not to be the case, and TARP is only the biggest--and perhaps, by the end of the day, the crookedest--waste of taxpayer money in history. Finally, 5) so far the only person or organization who appears to be looking out for the taxpayers is the Special Inspector General. We will be reading his future reports with great interest.

OF THE many possible issues that could snarl health-care reform, one of the biggest is whether the measure should include a government-run health plan to compete with private insurers. The public plan has become an unfortunate litmus test for both sides. The opposition to a public plan option is understandable; conservatives, health insurers, health-care providers and others see it as a slippery step down the slope to a single-payer system because, they contend, the government's built-in advantages will allow it to unfairly squash competitors.

For liberals, labor unions and others pushing to make health care available to all Americans, however, the fixation on a public plan is bizarre and counterproductive. Their position elevates the public plan way out of proportion to its importance in fixing health care. It is entirely possible to imagine effective health-care reform -- changes that would expand coverage and help control costs -- without a public option.

President Obama has said that he favors a public option but has been sketchy on details. His nominee for secretary of health and human services, Kathleen Sebelius, said that she wants a public plan to "challenge private insurers to compete on cost and quality" but "recognizes the importance of a level playing field between plans and ensuring that private insurance plans are not disadvantaged."

The argument for a public plan is that, without the need to extensively market itself or make a profit, it would do a better job of providing good health care at a reasonable cost, setting an important benchmark against which private insurers would be forced to compete. Even in a system where insurers are required to take all applicants, public plan advocates argue, incentives will remain for private plans to discourage the less healthy from signing up; a public plan is a necessary backstop. Moreover, if the playing field is level, public plan advocates argue, private insurers -- and those who extol the virtues of a competitive marketplace -- should have nothing to fear.

We disagree. It is difficult to imagine a truly level playing field that would simultaneously produce benefits from a government-run system. While prescription drugs are not a perfect comparison, the experience of competing plans in the Medicare prescription drug arena suggests that a government-run option is not essential to energize a competitive system that has turned out to cost less than expected. Insurers and private companies have been at least as innovative as the federal government in recent years in finding ways to provide quality care at lower costs. Medicare keeps costs under control in part because of its 800-pound-gorilla capacity to dictate prices -- in effect, to force the private sector to subsidize it. Such power, if exercised in a public health option, eventually would produce a single-payer system; if that's where the country wants to go, it should do so explicitly, not by default. If the chief advantage of a public option is to set a benchmark for private competitors, that could be achieved in other ways, for example, by providing for the entry of a public plan in case the private marketplace did not perform as expected.

Maybe we're wrong. Maybe it's possible to design a public option that aids consumers without undermining competition. If so, we certainly wouldn't oppose a program that included a public component. But it would be a huge mistake for the left to torpedo reform over this question.

“When an abundant natural fall of water is at hand, nothing can be cheaper or better than water power. But everything depends upon local circumstances. The occasional mountain torrent is simply destructive. Many streams and rivers only contain sufficient water half the year round and costly reservoirs alone could keep up the summer supply. In flat countries no engineering art could procure any considerable supply of natural water power, and in very few places do we find water power free from occasional failure by drought.”- W. S. Jevons, The Coal Question (London: Macmillan and Co., 1865), p. 129.

Thomas Friedman in the New York Times has presented Costa Rica as a model for the energy world, noting its reliance on renewable energy (hydro) to generate electricity. In response, we posted last week about how such dependence had left it vulnerable to the vagaries of rainfall, and (to a much lesser degree) wind. W. S. Jevons, the father of energy economics, said as much in 1865.

With all hydro development in the hands of the government, and with hydro responsible for 75-80% of power generation, any shortfall in rain can, within 1-2 weeks result in reduced electricity generation. And the odds have now caught up with Costa Rica – recent dryer conditions have led to blackouts in the country.

Exacerbating the country’s policy of hydro dependence for its power sector, recent investments have been run-of-river. This means that new dams have little storage capability and power output can be regulated only within broad ranges and depend on rainfall patterns over a very short period, ranging from hours to less than two weeks. Run-of-river projects are the ecologically preferred type of hydro development these days, since the construction does not involve flooding a large amount of land to create a reservoir. At the same time, the project’s output will fluctuate – not as much as wind or solar, but significant nevertheless.

When run-of-river hydro provides an essential element of a country’s electricity output, the system can be highly sensitive to even small variations in rainfall. For Costa Rica, a small reduction in rainfall, down just a bit over 2008, has proven beyond the capabilities of the country’s storage reservoirs to buffer.

As a result of recent rainfall variations, even the country’s modest electricity growth of just over 2% could not be met from current generation resources. The result has been cutbacks in electricity supply through periodic load shedding across the country. Predictably, the country’s industrial sector bears the brunt of unreliable electricity supply, and is 2% below last year’s level. Fluctuating electricity supply is bound to lead to problems with modern industrial process technologies and the country has virtually assured its continued dependence on tourism and plantation crop exports with such an energy policy.

The results of the country’s energy policy, denying citizens the ability to develop better sources of power generation, will be applauded by foreign eco-tourists who will return to an electricity supply rendered utterly reliable by reliance on coal, gas and nuclear. But what of the supposed beneficiaries – the citizens of Costa Rica – do they all really want to see their economic horizons shrink to hotel and restaurant jobs and agricultural labor? Talk about McJobs!

India's founding ideal of multicultural democracy is critical to both domestic cohesion and geopolitical interest, and it has defined how the country confronts terrorism at home. Modern India has much experience with terrorism, but most attacks have been rooted in separatist and ethnic insurgencies in rural frontier provinces. In the last decade, however, India has seen a steep rise in the number of attacks in urban areas, aimed at civilians, and committed not by rural insurgents but by young, middle-class jihadists. These domestic threats, which expose fault lines in the "idea of India," have been welcomed and at times supported by Pakistan, whose existence is founded in opposition to India. In fact, the apparent paradox between Pakistan's tolerance of the Lashkar-e-Taiba (LeT) terrorist group leading up to the November 26, 2008, attacks in Mumbai and Pakistan's internal struggle against extremists can be understood in the framework of these conflicting ideologies. For India, countering the threat of domestic jihadism is not only a security imperative; it is also a strategic necessity. This merits a new counterterrorism response by the Indian government and a renewed understanding of Indian Muslims and their place in India's pluralistic society.

President Barack Obama has reinvigorated the critics of George W. Bush's antiterror policies by opening the door to prosecuting or sanctioning those who crafted interrogation policy in the aftermath of the Sept. 11, 2001, terrorist attacks. These critics -- including the president -- are laboring under numerous misconceptions. Many of them have no experience with or understanding of military or CIA interrogation, the purpose of which is to gain actionable intelligence to safeguard our country. The recently released memos by lawyers in the Department of Justice's Office of Legal Counsel were written to assist interrogators in that critical mission. The memos cannot be fairly evaluated without that mission in mind.

Military and CIA interrogators are trained to use creative means of deception, and to play on detainee emotions and fears. This can be a nasty business. People unfamiliar with it, therefore, might even view a perfectly legitimate interrogation of a prisoner of war that is in full compliance with the Geneva Conventions as abhorrent by its very nature.

But military interrogation is not akin to a friendly chat across a conference table -- nor is it designed to gather evidence in a criminal trial, as an FBI interview might be. There is a fundamental distinction between law enforcement and military interrogations that we ignore at our peril.

Second-guessers can also fail to appreciate the increased importance of interrogation (and human intelligence in general) in the post 9/11 world. We face an enemy that wears no uniform, blends in with civilian populations, and operates in the shadows. This has made eliciting information from captured terrorists vital to the effort of finding other terrorists. As interrogation has become more important, drawing out useful information has become more difficult -- because hardened terrorists are often trained to resist traditional U.S. interrogation methods.

Fortunately, aggressive interrogation techniques like those outlined in the memos to the CIA are effective. As the memos explain, high-value detainees like Khalid Sheikh Mohammed (KSM), the mastermind of 9/11, and Abu Zubaydah, one of Osama bin Laden's key lieutenants, provided no actionable intelligence when facing traditional U.S. methods. It is doubtful that any high-level al Qaeda operative would ever provide useful intelligence in response to traditional methods.

Yet KSM and Zubaydah provided critical information after being waterboarded -- information that, among other things, helped to prevent a "Second Wave" attack in Los Angeles, according to the memos. Similarly, the 2005 report by Vice Adm. Albert Church on Defense Department interrogation policies, the "Church Report" -- of which I served as the executive editor -- documented the success of aggressive techniques against high-value detainees like Mohamed al Kahtani, 9/11's "20th hijacker."

The aggressive techniques in the CIA memos are also undeniably safe, having been adopted from Survival, Evasion, Resistance, Escape (SERE) training used with our own troops.

I have personally been waterboarded, put into stress positions, sleep deprived, slapped in the face. While none of this was enjoyable, I am none the worse for wear.

While such techniques are used in U.S. military training, some apparently consider them too brutal, too abusive, too inhumane -- in short, too much like "torture" -- to be used on fanatics like KSM who are bent on the mass murder of innocent American civilians. And if legal advisers such as Steven G. Bradbury, Jay S. Bybee and John Yoo are to be prosecuted for having sanctioned their use under careful controls, who's next? Every commander who ever implemented a SERE course?

Many critics also play the Abu Ghraib "trump card": The abuses of prisoners at that facility in Iraq allegedly "prove" the Bush administration's supposed policy of abuse, first codified in its legal memos. This ignores all relevant evidence.

As the Church Report concluded, after a thorough review of all Defense Department interrogation policies, the pictured abuses at Abu Ghraib bore no resemblance to approved policies at any level, in any theater. The 2004 Independent Panel to Review Department of Defense Detention Operations -- whose four members included two former secretaries of defense under President Jimmy Carter -- also stated that "no approved procedures called for or allowed the kinds of abuse that in fact occurred. There is no evidence of a policy of abuse promulgated by senior officials or military authorities."

Similarly, the critics like to default to Guantanamo as a symbol of the kind of abuse that Mr. Bush's antiterror policies allowed. Yet, at the time of the Church Report, there had been more than 24,000 interrogation sessions at Guantanamo and only three cases of substantiated interrogation-related abuse. All of them consisted of minor assaults in which military interrogators had exceeded the bounds of approved interrogation policy. Notably, the Church Report found that detainees at Guantanamo were more likely to have been injured playing recreational sports than in confrontations with interrogators or guards.

Mr. Bush's advisers were public servants with the memory of 9/11 still fresh in their minds, doing their best to give legitimate legal advice in a murky, largely undefined area of the law. Is this the stuff of which federal prosecutions, or even sanctions, are made?

As a former federal prosecutor, I know a good case from a bad one. I know a case based on solid evidence and even-handed application of the law versus one based on scoring political points. Mr. Obama and his attorney general, Eric Holder, have professed their desire to take politics out of the Justice Department, to restore integrity to a department that they believe had gone astray under Mr. Bush. Their recent actions, however, speak otherwise.

The bottom line is that any attempt to prosecute or sanction lawyers such as Messrs. Bradbury, Bybee or Yoo would be a fool's errand. And whatever our new president and his attorney general are, they aren't fools. Or at least I don't think they are. For the good of the country, I hope they don't prove me wrong.

Mr. McSwain, a former scout/sniper platoon commander in the Marines and assistant U.S. attorney, was executive editor of the 2005 Review of Department of Defense Detention Operations and Detainee Interrogation Techniques (The Church Report). He is an attorney in private practice in Philadelphia.

Economic links have always been an important basis for the China-U.S. relationship, and the growth in trade between the two countries has been robust since the establishment of normal diplomatic relations. Today, China and the U.S. are each other's second-largest trading partner; the value of the two-way trade in goods exceeds $300 billion.

U.S. businesses have benefited greatly. In the past five years, American exports to China have doubled. The U.S. trade surplus with China in services has grown 36% every year, and the overall value of U.S. export services to China exceeded $16 billion last year. U.S. businesses have invested more than $60 billion in 57,000 projects in China. In 2007, American-funded companies in China enjoyed a 17% increase of profit, while domestically the profit of U.S. businesses dropped by 3% on average.

But the commercial ties between our two nations are affected by the global financial crisis. Chinese statistics show bilateral trade dropped 6.8%, and U.S. investment in China slumped 19.4%, on a year-on-year basis in the fourth quarter of last year and the first quarter of this year.

History tells us that the more serious a crisis becomes, the more committed we must be to openness and cooperation. Regrettably, however, trade measures by the U.S. against China are on the rise. Recently, American industries have petitioned the U.S. government for antidumping investigations, and for investigations under the World Trade Organization's "special safeguard provision," which could restrict imports of Chinese products. This will seriously test China-U.S. economic and trade relations.

Despite these challenges, the need to foster positive Sino-American ties has never been greater. We need to recognize the existing differences between us in social systems and economic development, and constantly enhance mutual understanding and trust. Both countries should step up cooperation on trade and investment issues, and explore and establish new possibilities for cooperation in such areas as agriculture, new and high technology, finance, energy and the environment. Dialogue and communication also need to be intensified concerning multilateral and regional trade and economic affairs. To that end, I would like to put forth four proposals:

- First, seize the opportunity for cooperation, and work together to tackle the crisis. At present, both governments have rolled out economic stimulus packages on a massive scale, which in turn are expected to become new growth areas for our trade and investment cooperation. For example, China's demand for infrastructure, machinery and equipment, and environmental protection is huge. It is hoped that both countries would turn these opportunities into tangible outcomes.

- Second, mutually open markets to expand trade and investment. The Chinese government does not pursue a trade surplus with the U.S. We will continue to encourage Chinese companies to import more from the U.S., and we will also welcome U.S. companies and trade-promotion agencies to be more active in China.

Since foreign direct investment is a basic element of China's opening-up policy, we welcome American companies that want to increase their investment in China. Meanwhile, we also encourage capable Chinese companies to invest in the U.S. We hope that the U.S. government will welcome Chinese investments and create an open and transparent investment environment.

- Third, strengthen bilateral dialogue and resolve differences properly. As trading partners with broad and close ties, both countries should not allow differences on some issues to affect their cooperation in areas of common interests. We need to use the U.S.-China Strategic and Economic Dialogue and the U.S.-China Joint Commission on Commerce and Trade to boost strategic mutual trust, expand dialogue and cooperation, and establish a high-level and stable regime of bilateral trade and investment facilitation.

- Fourth, safeguard the environment for trade and advance the Doha Round. The U.S. and China, as the largest and the third-largest trading countries in the world, respectively, should take the lead in following up the consensus reached at the G-20 Summit in London and refrain from formulating any new trade protection policies before the end of 2010. We should also exercise caution, avoid arbitrary use of the trade remedies allowed by the World Trade Organization, and honor our commitment to fight protectionism. The two countries should also work together to advance the Doha Round, strictly follow the mandates of the Doha Development Agenda, lock in what has already been agreed to in past negotiations, avoid reopening negotiations or adding new subjects, and seek the success of this round.

A positive, cooperative and comprehensive Sino-American relationship will surely bring new prosperity and development to both economies. I hope and believe that bilateral trade will rise to a new high and exceed $500 billion in the coming five years, growing in a more balanced way.